Fed's QE3 should soften g-fee's impact

With an eye to leveling the playing field between Fannie Mae and Freddie Mac and the private mortgage market, the Federal Housing Finance Agency has directed the GSEs to hike their guarantee fee, or "g-fee," beginning in November 2012.

Ed DeMarco, acting director of the FHFA, said in a press release, "These changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital."

The g-fee, which is slated to increase by an average of 10 basis points, is a fee that Fannie and Freddie charge mortgage lenders they buy loans from to securitize. The fee serves to protect the lenders from credit losses on the loans that go into mortgage-backed securities.

What does this mean for mortgage borrowers?

The average g-fee is currently 26 basis points. The increase could send the fee up to as high as 50 basis points, making for a maximum hike of 24 basis points, according to Malcolm Hollensteiner, director of retail lending sales with Cherry Hill, N.J.-based TD Bank.

"Obviously, if you have a 10 to 24 basis point hike, we would assume that lenders that are selling their loans to Fannie Mae and Freddie Mac would have to pass on some of that increase to the consumer," says Hollensteiner.

The increase won't necessarily translate into an average mortgage rate increase of 10 basis points, but based on past experience, Hollensteiner expects that borrowers will end up paying one-eighth of a percent more on average, either in the form of higher interest rates or discount fees.

QE3

However, there is another factor at work that might serve to offset the impact of the g-fee hike -- "QE3." On September 13, the Federal Reserve embarked on the third installment of their asset-purchase efforts to push long-term interest rates lower. The aggressive plan is to buy $40 billion in mortgage-backed securities each month until the economy, specifically employment, improves.

Keith Gumbinger, vice president of HSH.com, said in an email that QE3 may have been done in part to anticipate the upcoming g-fee hike and its potential effect in pushing mortgage rates higher.

"With the Fed a more active buyer (of MBS), they can manipulate the price in the market so that the new fee has little or no net effect on the consumer's price. Even though, on an absolute basis, the cost of mortgage money is higher, it's a matter of 'it would be higher except for the Fed's influence.' "

Gumbinger expects that there could be downward pressure of as much as 25 basis points on rates because of QE3. In case originations slow down to the extent that the Fed controls a larger share of the market, there could be an even bigger impact on rates.

Credit is more of an issue

For the week ending September 28, HSH.com's weekly mortgage rates survey found that the average rate on a conforming 30-year fixed-rate mortgage was down to 3.50 percent. As of Monday, October 1, that average fell to 3.41 percent.

But as Gregg Busch, vice president with First Savings Mortgage Corp. in McLean, Va., points out, at this point it is not so much about interest rates as it is about access to lending.

"Until underwriting guidelines loosen up a little bit more, the housing market will just continue slowly and gradually improving," says Busch. "Lenders have tightened up their guidelines considerably. So right now I don't see 3 percent interest rates being any better than 3.5 percent because people just can't get mortgages."

Borrower options

For borrowers who would like to avoid any impact as a result of the upcoming g-fee hike, one option might be to turn to portfolio lenders. These lenders, such as banks that don't sell their loans to Fannie Mae and Freddie Mac, will not be impacted by the g-fee hike.